If you are a mutual funds investor, you have most likely read or seen the statement - "Mutual fund investments are subject to market risks." Have you ever wondered what this statement means?

Are you concerned that a mutual fund NAV or Net Asset Value depends on share price volatility?

Would you like to discover the reasons that contribute to the increase or decrease in mutual fund NAV?

Do you feel confused while listening to a mutual fund vs stock debate?

If your answer to any of these questions is yes, this article is for you. Head to the following sections to know about the top 3 factors that affect mutual fund NAV, besides share prices.

Do Share Price Fluctuations Impact Mutual Fund NAV?

The answer is 'Yes' and 'No.' Before evaluating the response, you need to understand a benchmark.

A benchmark is an index that a mutual fund scheme tracks for stock selection and performance analysis. Hence, if the benchmark is NIFTY SMALLCAP 50, the mutual fund scheme would mainly invest in companies that are a part of the index. When you evaluate a mutual fund's performance, you need to compare it with its benchmark. If the benchmark index has grown more than the fund, the fund has underperformed, and vice versa.

As a fact, when you invest in a stock, you put your capital in that stock. But investing in a mutual fund scheme means that you invest in all the companies the scheme invests in. Hence, if a fund treats NIFTY SMALLCAP 50 as its benchmark, your money will be divided among all or most companies in that index.

Hence, a mutual fund lets you diversify your risks. Unlike individual stocks, an index is rarely volatile. Since mutual funds follow indices, the chances of negative returns are much lesser compared to stocks.

Therefore, although share market volatility does affect the mutual fund NAV, the impact is often subdued. The risk spreads among all stocks in the scheme portfolio, thereby minimising the impact of the fall in the stock price of one or two specific stocks.

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3 Factors That Affect Mutual Fund NAV Fluctuation

The following 3 factors affect a mutual fund's NAV, besides the share price:

1. Age

The age of the mutual fund scheme affects its NAV. When mutual fund houses in India launch a new scheme, they call it a New Fund Offer (NFO). The base price of an NFO is always set to 10. Hence, if you invest INR 1,00,000 during the NFO period, you will get 10,000 units.
However, over time, the scheme's NAV may increase, and you will get fewer units against the same investment amount. Hence, unlike an NFO, mutual fund NAVs fluctuate more when they are old.

2. Expense Ratio

All mutual funds charge a fee, known as the expense ratio, for managing your money. The higher the expense ratio, the lower the profit. Back of the envelope calculations suggest that funds with an elevated expense ratio fluctuate less. In contrast, since low-expense funds pass on significant benefits to the investor, their NAVs fluctuate more.

3. Investment Rationale

Not all mutual funds invest in shares of companies. Many mutual fund schemes invest in money market instruments, treasury bills, government bonds, corporate Non-Convertible Debentures (NCDs), and commodities.

Such mutual funds are usually less volatile than those that invest in stocks. However, conventional wisdom suggests that the returns from equity mutual funds are much higher than funds that primarily invest in debt and money market instruments.


Besides the factors above, other things that affect mutual fund NAV include the type (direct or regular), dividend payouts, and entry or exit loads.

If you are still unsure about who is the winner in the battle of mutual funds vs stocks, click here to know more: https://www.mutualfundssahihai.com/en/mutual-funds-vs-shares-whats-diffe...

Author's Bio: 

I'm 32 years old Mutual Fund Investor & I love to guide peoples in investing.